Ken Murphy, Tesco’s new Chief Executive, has kicked off his reign by unveiling a healthy rise in the retailer’s half-year sales and profits.
Over the 26 weeks ended 29 August, the group’s pre-tax profit climbed 28.7% to £551m despite additional costs of £533m related to extra staffing and safety measures in response to the pandemic. However, this was principally offset by business rates relief of £249m and a jump in food sales buoyed by stockpiling and increased consumption at home.
On an operating profit level (before exceptional items), Tesco saw a 15.6% fall to £1.04bn. However, this was due to a £155m loss in its ailing banking division with retail operating profit growing 4.4% to £1.19bn. The core UK & Ireland division saw operating profit grow 6.4% to £1.13bn with a margin of 4.3%.
In the UK, total sales climbed 7.7% to £19.52bn with like-for-like growth of 7.6%. Food sales were up 9.2%, although this was partly offset by a 17.2% fall in clothing sales and 0.3% decline in general merchandise as people visited its stores less and prioritised grocery shopping.
Whilst like-for-like sales growth for the whole period eased slightly from the 8.7% jump seen in the second quarter, Tesco said it was continuing to see elevated demand across its food range, particularly in the meat, fish and poultry category and in beers, wines and spirits.
The group highlighted its success in doubling its online delivery capacity to reach 1.5m slots a week to meet raised demand. Online grocery sales grew from 9% of total UK sales to over 16% by the end of the half.
The pandemic has triggered significant changes in shopping behaviour. Tesco’s online sales grew 90% in the last three months of the period, while sales in its Express and One Stop convenience stores climbed 7.6% as more people shopped locally. In large stores, Tesco said sales grew by 1.4% as customers made fewer trips but bought more on each visit, with the average basket size increasing by 56%.
Tesco has been also pushing to improve its competitiveness with its ‘Aldi Price Match’ offer now extended to over 500 lines and Clubcard Prices offered on around 2,000 products. The group claimed it was making switching gains from Aldi for first time in a decade with its net promoter score – the number of customers who would recommend the retailer – up 2 points.
At Booker, total sales rose 11.0% (incl. a 9% contribution from the recently acquired Best Food Logistics) to £3.48bn with like-for-likes increasing 2.2%. The business experienced mixed trading during the period with retail sales up 22% but catering sales down 12% due to the shutdown of the hospitality sector early in the pandemic. Tesco highlighted that the business had doubled its market share and was benefitting from the integration of its recently acquired Best Food Logistics business.
Tesco Ireland was the group’s strongest performing business with total sales up 14.5% on a constant currency basis to £1.32bn and like-for-likes jumping 15.5%. Growth was said to have been particularly strong in its large stores and online grocery business.
Meanwhile, the group’s operations in Central Europe continued to struggle with total sales down 1.5% to £1.93bn and like-for-likes falling 0.9%. Tesco confirmed today the £8.2bn sale of its chains in Thailand and Malaysia was on track to be completed by the end of the calendar year. Meanwhile, the sale of its Polish business to the Salling Group is expected to be completed by Spring 2021.
Murphy, formerly of Walgreens Boots Alliance, succeeded Dave Lewis last week. He is expected to face several significant challenges in his first few months in charge, including the longer-term impact of the coronavirus crisis, a deep recession and possible disruption when the UK’s Brexit transition period finishes at the end of the year.
Acknowledging that the first half of the year had been a testing time, Murphy suggested he wasn’t planning to make any major changes in the next few months. “I think you can take it that I’m really happy with the strategy and direction of the company, unless you actually see it changing in the stores,” he told reporters today.
“As far as I’m concerned, my job is to maintain momentum in the business and keep us focused on delivering a brilliant Christmas.”
However, he warned that the key Christmas period remained unpredictable given the recent changes to guidance about family gatherings. “We will have as good a Christmas as possible under the circumstances,” Murphy said.
Broker Shore Capital praised the results, saying: “Lewis handed over a well-oiled machine.”
John Moore, senior investment manager at Brewin Dolphin, added: “Tesco’s core operations have successfully managed a highly challenging period for supermarkets as a whole and the additional costs that have come with that.
“Despite the exceptions mentioned, Tesco appears to be in a good position to continue building on the positive momentum from its core platform.”
NAM Implications:
- An additional benefit has to have been Tesco’s ability to sell at near-normal shelf prices (i.e. reduction in price promotions)
- …for the four lockdown months…
- …technically making it easier to fund their EDLP strategy going forward.
